Edited version of your written advice

Authorisation Number: 1051302032098

Date of advice: 1 November 2017

Ruling

Subject: Goods and Services Tax (GST) and supply of going concern

Question

Is the sale of your business together with the sale of your depot site a supply of a GST-free going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The sale of your business together with the sale of your depot site is a supply of a GST-free going concern. However, the sale of the other depot sites owned by A and B is not a supply of a GST-free going concern as section 38-325 of the GST Act does not apply. This sale is a taxable supply.

Relevant facts and circumstances

You carried on an enterprise of waste collection.

A and B are your shareholders and directors.

A and B allowed you to use depot sites owned by them. As it was a private arrangement, no formal lease existed. You paid all outgoings relating to the sites as part of the arrangement.

On dd/mm/yy you entered into a Business Sale Agreement with a purchaser to sell your business for $XX plus GST (if any).

The purchase price (exclusive of GST) for your business includes buying over the following business assets:

● Plant and equipment

● Fabricated bins

● Motor vehicles

● Intellectual property

● Materials recycling facility

● All other assets (including goodwill)

Completion of the sale is subject to the transfer of a relevant Licence to the purchaser.

The purchaser is required to enter into a Land Contract for a number of depot sites. One of the depot sites is owned by you. The remaining depot sites are owned by A and B.

You are also required to enter into the Land Contract and must ensure that A and B also enter into the Land Contract simultaneously with you.

If one party fails to enter into the Land Contract then the other party can terminate the Business Sale Agreement.

Completion of the Business Sale Agreement must take place simultaneously with the completion of the Land Contract.

You must facilitate and ensure that the purchaser and its advisers are authorised and provided with access to the sites, the Plant and Equipment, Stock, Motor Vehicles, Records and Key Employees at all reasonable times and on reasonable notice before the completion date to enable the purchaser to become familiar with the conduct of the business.

You must allow the purchaser and its authorised representatives to consult with your accountant and make copies of the material examined. The purchaser must keep all information obtained confidential.

You must, until the date of completion, carry on the business in the usual and ordinary manner comparable to which you conducted the business during the 12 month period before the date of the Business Sale Agreement.

You must, until the date of completion, maintain insurance of the assets and the business covering for such risks and for such amounts as would be maintained in accordance with prudent business practices.

The purchaser agrees to take on the business contracts, property lease and other customers contracts held by the business, from the date of completion, subject to them being capable of assigning over to the purchaser.

The purchaser agrees to make offers of continuing employment to each of the employees.

The purchaser must offer employment to C as Operations Manager for an initial fixed term on conditions of employment which are no less favourable than the existing employment conditions.

You carry on the enterprise of waste collection until the day of completion.

The Business Sale Agreement states that you and the purchaser agree that the sale of the business is a supply of a going concern.

You provided us with a copy of the Business Sale Agreement.

You and the purchaser are both registered for GST.

A and B are registered for GST.

Sales of the sites

A, B and you entered into a sale contract with the purchaser for sale of the depot sites.

The contract provides that the prices for the sites are GST exclusive.

A, B and you, and the purchaser agreed in writing that the sales of the sites are supplies of going concern.

A and B will carry on the enterprise of commercial leasing until settlement.

You will carry on your enterprise of waste collection until settlement.

As part of the sale negotiation, you are required to enter into a formal lease agreement with A and B for the depot sites owned by them.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-325(2)

A New Tax System (Goods and Services Tax) Act 1999 subdivision 38-J

Reasons for decision

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

● it makes a supply for consideration; and

● the supply is in the course or furtherance of an enterprise that it carries on; and

● the supply is connected with the indirect tax zone; and

● the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

GST-free supply

Subsection 38-325(1) of the GST Act provides that the supply of a going concern is GST-free if:

(a) the supply is for consideration; and

(b) the recipient is registered or required to be registered; and

(c) the supplier and the recipient have agreed in writing that the supply is of a going concern.

The term ‘supply of a going concern’ is defined in subsection 38-325(2) of the GST Act as a supply under an arrangement which:

(a) the supplier supplies to the recipient all of the things necessary for the continued operation of an enterprise; and

(b) the supplier carries on, or will carry on, the enterprise until the day of the supply (whether or not as part of a larger enterprise carried on by the supplier).

Paragraph 19 of Goods and Services Tax Ruling GSTR 2002/5 Goods and services tax: when is a ‘supply of a going concern’ GST-free? provides that the term ‘supply under an arrangement’ includes a supply under a single contract or supplies under multiple contracts which comprise a single arrangement. However, the things supplied under the arrangement must relate to the same enterprise.

Under paragraphs 73 and 75 of the GSTR 2002/5 a thing is necessary for the continued operation of an enterprise if the enterprise could not be operated by the recipient in the absence of the thing and the two elements that are essential for the continued operation of an enterprise are:

● the assets necessary for the continued operation of the enterprise including, where appropriate, premises, plant and equipment, stock-in-trade and intangible assets (goodwill, contracts, licences and quotas); and

● the operating structure and process of the enterprise consisting of the commercial or economic activity relevant to the type of enterprise being conducted.

You entered into a business sale agreement with the purchaser for the sale of your business. In selling your business, you are supplying to the purchaser all the assets of the business. These include plant and equipment, fabricated bins, motor vehicles, intellectual property, material recycling facility and goodwill.

You also agreed to transfer the relevant Licence, business contracts, property leases, customers’ contracts and employees’ contracts to the purchaser.

In addition, you agreed to provide the purchaser and their advisers with access to the depot sites, plant and equipment, stock, motor vehicles, records and key employees before the completion date of the business sale to enable the purchaser to become familiar with the running of the business.

Furthermore as part of the conditions of the business sale agreement, you entered into a Land Contract with the purchaser to sell a depot site owned by you and was used as part of the enterprise you carried on.

In our view, the business sale agreement and the Land Contract constitute supplies under two contracts that comprise a single arrangement relating to the same enterprise. Under the business sale agreement and the Land Contract you supplied to the purchaser all the things necessary for the continued operation of the enterprise that you carried on. You also carried on your enterprise until the date of completion. Thus, subsection 38-325(2) of the GST Act is satisfied and the supply of your enterprise together with the sale of the depot site owned by you is a supply of a going concern.

Furthermore we consider that the supply of your enterprise, as a going concern, satisfied all of the criteria in subsection 38-325(1) of the GST Act as:

● The sale of the business and the sale of your depot site are for monetary amounts. Thus, these supplies are for consideration.

● You and the purchaser are both registered for GST.

● You and the purchaser agreed in writing that the sale of the business and the sale of the depot site are supplies of going concern. This is outlined in the Business Sale Agreement and the Land Contract.

Therefore, the supplies of your enterprise and your depot site are GST-free supplies of going concern under subdivision 38-J of the GST Act.

Supplies of depot sites owned by A and B

A and B carried on an enterprise of commercial leasing and leased their depot sites to you. They are registered for GST.

A and B entered into a sale contract with the purchaser to sell the depot sites owned by them.

Although there is a formal lease agreement between you and A and B for their depot sites, this lease agreement will not be transferred over to the purchaser. Instead upon completion the purchaser, as the new owner, will use the sites as part of their enterprise of waste collection. Therefore, A and B are not supplying to the purchaser all the things that are necessary for the continued operation of their leasing enterprise. They are selling their real property assets and winding up their leasing enterprise. Thus, subdivision 38-J of the GST Act does not apply to the sale of the deposit sites owned by A and B.

A and B are registered for GST. Their depot sites are sold for monetary amount, hence consideration is provided for this supply. The sale of these depot sites took place in Australia, which is the indirect tax zone, and is made as part of A and B leasing enterprise. Therefore, all the criteria of section 9-5 of the GST Act are met which result in the sale of the depot sites by A and B as a taxable supply for GST purposes.